Global cues, futures & options expiry to dictate trend

The market is likely to dance to global tunes in absence of any near term major domestic trigger with Q4 March 2008 results almost over. Expiry of May 2008 futures & options series on Thursday, 29 May 2008 will keep the market volatile. As per reports, rollover of Nifty positions from May 2008 series to June 2008 series stood at 27.50%, as on 23 May 2008.

Aggregate results of 1886 companies showed 18.70% rise in net profit on 22.60% rise in net sales in Q4 March 2008 over Q4 March 2007, so far. There was 28.10% rise in net profit on 22% rise in net sales in the year ended March 2008 over year ended March 2007.

Forthcoming inflation data will be closely watched as it remains as a major worry and hindrance for the domestic growth. High inflation may compel the government to take more fiscal measures to rein in prices in addition to slew of measures taken recently.

Inflation based on the whole price index rose 7.82% in the year through 10 May 2008, marginally lower than 7.83% rise in the previous week, government data released on 23 May 2008, showed. Meanwhile, inflation for the year through 15 March 2008 was revised upwards to 8.02% compared to provisional figure of 6.68%.

Foreign institutional investors (FII) sold shares worth Rs 673.40 crore in this month, till 21 May 2008. They sold shares worth Rs 11,031.40 crore in calendar year 2008, till 21 May 2008. Domestic funds sold shares worth Rs 639.80 this month, till 14 May 2008. Mutual funds were net sellers of shares worth Rs 578.30 crore in this month, till 20 May 2008.

Earnings downgrade amid rising input and interest costs, high inflation and drying up of global liquidity due to credit crisis remain major concern for the Indian stock market.

With parliamentary elections scheduled next year (May 2009), the government may leave no stone unturned in its attempt to tame inflation. This is bad news for commodity shares from cement and steel sector.

Meanwhile, as per a recent study by CLSA, large amount of foreign currency convertible bonds (FCCBs) issued by Indian companies are coming up for redemption in the next 18-24 months. After recent stock market volatility many FCCBs are at risk of not converting i.e. if the stock market remains subdued, it will stop the bond holders from opting for an equity conversion as it will be easier for them to buy the stock from the open market instead of paying the agreed premium.

When the FCCBs come for redemption, some of these companies may have to take on more debt to redeem the FCCB, thereby raising interest outgo. In the event FCCBs don't get converted, companies have the option to lower the conversion price in line with the market, leading to higher equity dilution. If companies decide to issue fresh FCCBs to finance redemption of FCCBs, it will be at lower premium than earlier.

With the rupee tumbling against the dollar in the last few days, the government may ease restrictions on overseas corporate borrowing when it, together with the RBI, reviews the external commercial borrowing (ECB) policy later this month, reports suggest. Last year, the government had imposed restrictions on ECBs in a bid to check in surge in rupee against the dollar. There are many Indian corporates who will eagerly seek cheap overseas funds if the RBI re-opens the ECB tap, analysts reckon.

The structural growth drivers of the Indian economy remain intact – India’s economy is expected to witness a decent-to-strong growth for a long period of time due to favourable demographics. Acceleration in infrastructure creation will be another driver of strong growth in India’s economy. A CLSA report says India’s infrastructure development is set to accelerate, backed by greater private sector participation and improved finances of government and public sector enterprises. Rating agency Crisil in its outlook for Indian economy for the year through March 2009 has stated that the overall growth scenario is expected to remain strong with investment as the main driver.

Given the continued inflow to unit linked insurance plans (Ulips) and equity linked savings schemes (ELSS) of mutual funds, stock-specific buying will continue depending on fundamentals of individual stocks. Insurance firms are now a major player in the Indian stock market given the huge mop up in Ulips in recent years. It was buying support from domestic funds which had aided the recent recovery on the bourses.

Meanwhile, as per recent reports, ELSS which offer tax benefit are catching the fancy of small savers. ELSS funds saw their collective assets jump more than nine times to about Rs 16000 crore in three years ending March 2008. In 2005 the investment limit eligible for income tax breaks was raised ten times to Rs 1,00,000 rupees for ELSS funds. Systematic investment plan (SIP) are said to be driving inflows into ELSS funds.

The key benchmark indices suffered losses in the week ended Friday, 3 May 2008 following concerns that soaring global crude oil prices which struck record high of over $135 barrel and spiraling inflation will impact growth.

The BSE Sensex slumped 785.30 points or 4.50% to 16,649.64 in the week ended Friday, 23 May 2008. The S&P CNX Nifty declined 211.15 points or 4.09% to 4,946.55in the week.